United States v. Daryl Bank ( 2020 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 19-4356
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
DARYL G. BANK,
Defendant - Appellant.
Appeal from the United States District Court for the Eastern District of Virginia, at
Norfolk. Mark S. Davis, Chief District Judge. (2:17-cr-00126-MSD-LRL-1)
Argued: April 30, 2020 Decided: July 14, 2020
Before GREGORY, Chief Judge, and DIAZ and THACKER, Circuit Judges.
Affirmed by published opinion. Judge Thacker wrote the opinion, in which Chief Judge
Gregory joined. Judge Diaz wrote an opinion concurring in the judgment.
ARGUED: James O. Broccoletti, ZOBY & BROCCOLETTI, PC, Norfolk, Virginia, for
Appellant. Andrew Curtis Bosse, OFFICE OF THE UNITED STATES ATTORNEY,
Norfolk, Virginia, for Appellee. ON BRIEF: G. Zachary Terwilliger, United States
Attorney, Alexandria, Virginia, Melissa E. O’Boyle, Assistant United States Attorney,
Elizabeth M. Yusi, Assistant United States Attorney, OFFICE OF THE UNITED STATES
ATTORNEY, Norfolk, Virginia, for Appellee.
THACKER, Circuit Judge:
This appeal presents the purely legal issue of whether disgorgement ordered in a
civil Securities and Exchange Commission (“SEC”) proceeding constitutes a “criminal
penalty” for purposes of the Double Jeopardy Clause, such that an individual cannot be
later prosecuted for the conduct underlying the disgorgement.
In April 2015, the SEC initiated enforcement proceedings in the District of Arizona
against Daryl G. Bank (“Appellant”) for illegitimate investment activities. In 2017,
Appellant entered into a consent agreement with the SEC, and the United States District
Court for the District of Arizona ultimately held Appellant liable for disgorgement in the
amount of $4,494,900.
Shortly thereafter, a grand jury in the Eastern District of Virginia returned an
indictment charging Appellant with, inter alia, securities fraud and unlawful sale of
securities, based in part on the same conduct underlying the SEC proceeding. Appellant
filed a motion to dismiss the indictment, arguing that, pursuant to the Double Jeopardy
Clause, he could not be prosecuted for that conduct, as he had already been punished for
it. The district court denied the motion.
We join with every other circuit to have decided the issue in holding that
disgorgement in an SEC proceeding is not a criminal penalty pursuant to the Double
Jeopardy Clause. Therefore, we affirm.
I.
On April 6, 2015, the SEC initiated a civil enforcement action against Appellant and
others in the United States District Court for the District of Arizona (the “SEC Action”).
2
The complaint alleged, inter alia, that Appellant, through fundraising entities that he owned
and operated, offered and sold securities “purporting to raise funds to apply for F[ederal]
C[ommunications] C[ommission] licenses.” J.A. 21. 1 According to the complaint,
Appellant and others misled investors, assuring them their investment would yield high
returns when they sold the Federal Communications Commission licenses to major cellular
wireless carriers such as Sprint, but in reality, Appellant and his cohorts knew, or should
have known, the licenses could never be sold or leased to any major wireless carriers. See
id.
In January 2017, Appellant entered into an agreement with the SEC (the “Consent
Agreement”), consenting to judgment being entered against him “[w]ithout admitting or
denying the allegations of the [SEC] complaint.” J.A. 135. The Consent Agreement also
contained a clause stating that Appellant “waives any claim of Double Jeopardy based upon
the settlement of this proceeding, including the imposition of any remedy or civil penalty
herein.” Id. at 137.
On February 7, 2018, the United States District Court for the District of Arizona
entered a final judgment against Appellant in the SEC Action, holding Appellant civilly
liable for a disgorgement of $4,494,900, representing profits gained as a result of the
1
Citations to the “J.A.” refer to the Joint Appendix filed by the parties in this appeal.
The Federal Communications Commission “issues licenses to use the various frequencies
[that comprise the available wireless capacity, or spectrum] throughout the country. The
most common licenses involve transmitting radio, television, and cellular telephone signals
on certain frequencies.” J.A. 26.
3
conduct alleged in the SEC complaint; pre-judgment interest in the amount of $802,553;
and a civil penalty of $4,494,900, all pursuant to 15 U.S.C. §§ 77t(d), 78u(d)(3). See J.A.
148. Three months later, on May 25, 2018, a grand jury in the Eastern District of Virginia
returned the operative second superseding indictment 2 against Appellant and his
codefendants, charging 28 counts of mail fraud, wire fraud, and violations of securities
laws.
Appellant filed a motion to dismiss the second superseding indictment. He argued
that a recent Supreme Court case, Kokesh v. Securities and Exchange Commission, 137 S.
Ct. 1635, 1639 (2017), which held that disgorgement is a “penalty” for purposes of a statute
of limitations, rendered his disgorgement a “criminal sanction” for purposes of the Double
Jeopardy Clause. J.A. 110. The Government responded that Kokesh did not address the
precise issue at hand, and in any event, Appellant waived his ability to challenge the
indictment by agreeing to the Consent Agreement’s waiver clause in the SEC Action.
The district court denied the motion to dismiss. It first concluded the evidence was
insufficient to demonstrate that Appellant relinquished a known right in agreeing to the
waiver clause in the Consent Agreement. The district court then held Appellant’s
disgorgement in the SEC Action did not bar subsequent criminal prosecution for purposes
of the Double Jeopardy Clause.
2
The original indictment was returned on August 23, 2017, and a first superseding
indictment was returned on April 19, 2018. The panoply of securities fraud charges at
issue here did not appear until the second superseding indictment on May 25, 2018.
4
Appellant filed a timely notice of appeal, and we possess jurisdiction pursuant to 28
U.S.C. § 1291 and the collateral order doctrine. See Abney v. United States, 431 U.S. 651,
662 (1977) (concluding, pursuant to the collateral order doctrine, “the courts of appeals
may exercise jurisdiction over an appeal from a pretrial order denying a motion to dismiss
an indictment on double jeopardy grounds”).
II.
We review de novo whether a waiver of one’s constitutional rights is valid. See
United States v. Robinson, 744 F.3d 293, 298 (4th Cir. 2014). We also review de novo
questions concerning the Double Jeopardy Clause. See United States v. Schnittker, 807
F.3d 77, 81 (4th Cir. 2015).
III.
A.
Waiver
The Government contends that Appellant, in signing the Consent Agreement in the
SEC Action, effected a knowing and intelligent waiver of his right to contest a future
prosecution on Double Jeopardy grounds. The Consent Agreement provided the following:
Consistent with 17 C.F.R. § 202.5(f), this Consent resolves
only the claims asserted against Defendant in this civil
proceeding. Defendant acknowledges that no promise or
representation has been made by the SEC . . . with regard to
any criminal liability that may have arisen or may arise from
the facts underlying this action or immunity from any such
criminal liability. Defendant waives any claim of Double
Jeopardy based upon the settlement of this proceeding,
including the imposition of any remedy or civil penalty herein.
J.A. 137 (emphasis supplied).
5
Defendants are permitted to waive their constitutional right to assert a Double
Jeopardy claim. See Menna v. New York, 423 U.S. 61, 62–63 n.2 (1975) (per curiam).
However, “[a] waiver is ordinarily an intentional relinquishment or abandonment of a
known right or privilege,” and courts should “indulge every reasonable presumption
against waiver of fundamental constitutional rights,” rather than “presume acquiescence in
the loss” of such rights. Johnson v. Zerbst, 304 U.S. 458, 464 (1938) (internal quotation
marks omitted); see also United States v. Morgan, 51 F.3d 1105, 1110 (2d Cir. 1995) (“In
examining a purported waiver of the double jeopardy right, we must draw all reasonable
presumptions against the loss of such a right.”). Moreover, the language of the waiver
must be “crystal clear.” United States v. Van Waeyenberghe, 481 F.3d 951, 957 (7th Cir.
2007) (declining to decide Double Jeopardy challenge based on waiver alone, where “the
language [in the waiver] does not specifically bar double jeopardy claims in future criminal
proceedings” (emphasis in original)).
Like the district court, we decline to rely on waiver to dispose of this matter. To
begin, here, the waiver does not specifically bar double jeopardy claims in future
proceedings, or in criminal proceedings. See Van Waeyenberghe, 481 F.3d at 957.
Moreover, the waiver clause in the Consent Agreement purports to waive a challenge to
“the imposition of any remedy or civil penalty.” J.A. 137. At the time Appellant signed
the Consent Agreement, the Supreme Court had not considered disgorgement to be a
penalty. But as explained further below, Kokesh did just that. Thus, what Appellant’s
waiver represented at the time of the Consent Agreement changed after Kokesh. For these
reasons, and because we draw all reasonable presumptions against a waiver of one’s
6
constitutional rights, we decline to rely on the waiver in the Consent Agreement in
disposing of this appeal.
B.
Disgorgement as a Civil or Criminal Penalty
Appellant argues he “was subjected to the penalty of disgorgement of millions of
dollars for violations of securities laws. The government now seeks to punish him again
for the very same conduct. This is the very essence of Double Jeopardy.” Appellant’s Br.
13 (citations omitted).
The Double Jeopardy Clause provides that no person “shall be . . . subject for the
same offence to be twice put in jeopardy of life or limb.” U.S. Const. amend. V. It
“prohibits successive governmental criminal prosecutions and successive governmental
punishments for the same conduct.” Jones v. Secs. & Exch. Comm’n, 115 F.3d 1173, 1183
(4th Cir. 1997) (emphasis supplied). However, the doctrine “does not prohibit the
imposition of all additional sanctions that could, in common parlance, be described as
punishment. [It] protects only against the imposition of multiple criminal punishments for
the same offense.” Hudson v. United States, 522 U.S. 93, 98–99 (1997) (emphasis in
original) (alterations, citations, and internal quotation marks omitted). See also Breed v.
Jones, 421 U.S. 519, 528 (1975) (“In the constitutional sense, jeopardy describes the risk
that is traditionally associated with a criminal prosecution.”); United States ex rel. Marcus
v. Hess, 317 U.S. 537, 548–49 (1943) (explaining that only “criminal punishment”
“subject[s] the defendant to ‘jeopardy’ within the constitutional meaning”); Helvering v.
Mitchell, 303 U.S. 391, 398–99 (1938).
7
Two Supreme Court cases -- Kokesh v. Securities and Exchange Commission and
Hudson v. United States -- inform our decision as to whether Appellant’s disgorgement
was a civil penalty, which does not invoke the Double Jeopardy Clause, or a criminal
penalty, which does.
1.
Kokesh v. Securities and Exchange Commission
In Kokesh, the Court was asked to decide whether disgorgement in an SEC
enforcement proceeding is considered a “penalty” for purposes of a statute of limitations
provision stating, “[A]n action, suit or proceeding for the enforcement of any civil fine,
penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced
within five years from the date when the claim first accrued.” 28 U.S.C. § 2462; see
Kokesh, 137 S. Ct. at 1645. The unanimous Court concluded that disgorgement is a penalty
for statute of limitations purposes -- and thus, disgorgement actions must be commenced
within five years of accrual -- for three reasons.
First, “SEC disgorgement is imposed by the courts as a consequence for violating
. . . public laws.” Kokesh, 137 S. Ct. at 1643. A securities violation is “committed against
the United States rather than an aggrieved individual.” Id.
Second, disgorgement is “imposed for punitive purposes.” Kokesh, 137 S. Ct. at
1643. Indeed, “the primary purpose of disgorgement orders is to deter violations of the
securities laws by depriving violators of their ill-gotten gains,” and “[s]anctions imposed
for the purpose of deterring infractions of public laws are inherently punitive.” Id.
(alteration and internal quotation marks omitted).
8
Third and finally, the Court reasoned that in many cases, “disgorgement is not
compensatory. As courts and the Government have employed the remedy, disgorged
profits are paid to the district court, and it is within the court’s discretion to determine how
and to whom the money will be distributed.” Kokesh, 137 S. Ct. at 1644 (internal quotation
marks omitted). In sum, “SEC disgorgement . . . bears all the hallmarks of a penalty: It is
imposed as a consequence of violating a public law and it is intended to deter, not to
compensate.” Id.
However, we must look not only to what Kokesh says about disgorgement, but also
what it did not say. See United States v. Dyer, 908 F.3d 995, 1001 (6th Cir. 2018) (“It is
important to recognize what the Court did not say in Kokesh.” (emphasis in original)).
First, Kokesh did not conclude that disgorgement is a criminal penalty. Second, Kokesh
did not mention the Double Jeopardy Clause. Its holding was narrowly confined to
interpretation of a statute of limitations provision. 3
2.
Hudson v. United States
Whereas Kokesh provides the “penalty” piece of the puzzle in our Double Jeopardy
inquiry, Hudson provides the “civil or criminal” piece. Before and after Kokesh, courts
3
The Supreme Court cautioned, “Nothing in [its] opinion should be interpreted as
an opinion on whether courts possess authority to order disgorgement in SEC enforcement
proceedings.” Kokesh, 137 S. Ct. at 1642 n.3. However, the Supreme Court recently
decided that disgorgement may be ordered as equitable relief in an SEC enforcement
action. Liu v. Sec. & Exch. Comm’n, --- S. Ct. ---, 2020 WL 3405845, at *2 (U.S. June
22, 2020).
9
have routinely relied on the two part test of Hudson v. United States, 522 U.S. 93 (1997),
to determine whether a sanction is a criminal penalty for purposes of the Double Jeopardy
Clause.
Hudson instructs that deciding whether a sanction is a criminal or civil penalty
requires two steps. First, we begin with construction of the statute from which the penalty
stems. At this step, we ask “whether the legislature, in establishing the penalizing
mechanism, indicated either expressly or impliedly a preference for one label or the other.”
Hudson, 522 U.S. at 99 (internal quotation marks omitted).
Second, even if the legislature “has indicated an intention to establish a civil penalty,
we . . . inquire[] further whether the statutory scheme was so punitive either in purpose or
effect, as to transform what was clearly intended as a civil remedy into a criminal penalty.”
Hudson, 522 U.S. at 99 (alteration, citation, and internal quotation marks omitted). Hudson
provided seven factors as “useful guideposts” in this inquiry:
(1) whether the sanction involves an affirmative disability or
restraint; (2) whether it has historically been regarded as a
punishment; (3) whether it comes into play only on a finding
of scienter; (4) whether its operation will promote the
traditional aims of punishment -- retribution and deterrence;
(5) whether the behavior to which it applies is already a crime;
(6) whether an alternative purpose to which it may rationally
be connected is assignable for it; and (7) whether it appears
excessive in relation to the alternative purpose assigned.
Id. at 99–100 (alteration and internal quotation marks omitted). Notably, “these factors
must be considered in relation to the statute on its face, and only the clearest proof will
suffice to override legislative intent and transform what has been denominated a civil
10
remedy into a criminal penalty.” Id. at 100 (emphasis supplied) (citation and internal
quotation marks omitted).
3.
The District Court’s Decision
Here, the district court below applied the Hudson test to Appellant’s disgorgement.
At step one (the statutory construction step), the district court recognized that certain
statutes authorized the District of Arizona’s disgorgement order in the SEC Action. Below,
the district court explained,
Some courts suggest the authority [for disgorgement] comes
from the provisions granting general equity jurisdiction in
securities law violation cases (15 U.S.C. § 77v(a) and 15
U.S.C. § 78aa). See, e.g., SEC v. Palmisano, 135 F.3d 860,
865-66 (2d Cir. 1998); SEC v. Desai, 145 F. Supp. 3d 329,
337–38 (D.N.J. 2015) (“. . . 15 U.S.C. § 77v(a), and . . . 15
U.S.C. § 78aa[] allow for disgorgement of all profits derived
from violating the securities laws.”). Other courts suggest
disgorgement is an ancillary equitable power available to
courts under the statutory provisions that grant courts the
authority to issue injunctions in securities law violation cases
(15 U.S.C. § 77t(b) and 15 U.S.C. 78u(d)(1)). See, e.g., SEC
v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989)
(“Disgorgement, then, is available simply because the relevant
provisions of the Securities Exchange Act of 1934, . . . 15
U.S.C. §§ 78u(d) and (e), vest jurisdiction in the federal
courts.”); SEC v. Materia, 745 F.2d 197, 200–01 (2d Cir.
1984). Which statute actually authorizes disgorgement does
not impact the Court’s analysis on the issue of whether
Congress intended disgorgement to be civil or criminal
because, as explained below, the language of each statute
impliedly indicates a preference for the civil label.
United States v. Bank, 378 F. Supp. 3d 451, 457 (E.D. Va. 2019). Thus, at step one, the
district court concluded that Congress had a preference that disgorgement would be a civil
11
penalty. At step two, the district court ticked through the seven factors and found that, on
balance, there was no “clear[] proof” sufficient to transform the civil penalty to a criminal
one. Id. at 460 (quoting Hudson, 522 U.S. at 100).
4.
Sister Circuit Decisions
Both before and after Kokesh, seven of our sister circuits have held that a
disgorgement order is not a criminal penalty subject to the Double Jeopardy Clause. None
of our sister circuits has held otherwise. Six of these cases were decided before Kokesh.
See United States v. Melvin, 918 F.3d 1296, 1301 (11th Cir. 2017) (“Melvin has failed to
demonstrate with the ‘clearest proof’ necessary that the penalties [including disgorgement]
imposed as a result of his earlier civil and administrative proceedings were so punitive that
they must be treated as criminal penalties.”); United States v. Van Waeyenberghe, 481 F.3d
951, 958–59 (7th. Cir. 2007) (on plain error review, observing Van Waeyenberghe offered
“little to no analysis under Hudson as to why the injunction, disgorgement, and restitution
required of him are anything other than equitable remedies that present no bar to
subsequent criminal prosecution”); United States v. Perry, 152 F.3d 900, 904 (8th Cir.
1998) (adopting reasoning of Secs. & Exch. Comm’n v. Palmisano); Secs. & Exch. Comm’n
v. Palmisano, 135 F.3d 860, 865–66 (2d Cir. 1998) (applying the Hudson test, noting, “the
nature of the sanction cannot turn solely on whether the conduct at issue is also a crime,
for it is well established that Congress may impose both a criminal and a civil sanction in
respect to the same act or omission” (internal quotation marks omitted)); United States v.
Gartner, 93 F.3d 633, 635 (9th Cir. 1996) (pre-Hudson, recognizing that a “deterrent
12
purpose . . . does not automatically convert the penalty into [criminal] punishment”
(internal quotation marks omitted)); Secs. & Exch. Comm’n v. Bilzerian, 29 F.3d 689, 696
(D.C. Cir. 1994) (noting the equitable nature of disgorgement, as the court “order[s] [the
defendant] to give up only his ill-gotten gains” and “d[oes] not subject him to an additional
penalty”). 4
One case -- United States v. Dyer, 908 F.3d 995, 1003 (6th Cir. 2018) -- was decided
after Kokesh and, thus, is most relevant to the case at hand because that court had a chance
to analyze Hudson against the Supreme Court’s declaration that disgorgement is a
“penalty.” Dyer reasoned, “[T]he statement in Kokesh that disgorgement is a ‘penalty’ is
not a game changer.” Id. Kokesh’s holding was “narrow and limited solely to the statute
of limitations in 28 U.S.C. § 2462. Nothing from Kokesh serves as the ‘clearest proof’ we
require to transform a civil remedy into a criminal punishment for Double Jeopardy
purposes.” Id.
5.
Analysis
As explained below, we conclude that disgorgement in Appellant’s SEC proceeding
is not a criminal penalty for purposes of the Double Jeopardy Clause, and the district court
did not err in denying the motion to dismiss.
4
The Tenth Circuit also rejected a pre-Hudson argument that a prosecution after an
SEC enforcement action violated the Double Jeopardy Clause, reasoning that the SEC
judgment bore a rational relationship to the loss caused by the defendant. See United States
v. Rogers, 960 F.2d 1501, 1506–07 (10th Cir. 1992).
13
a.
Hudson Step One: Legislative Preference?
Applying the Hudson two-step test, we first ask “whether the legislature, in
establishing the penalizing mechanism, indicated either expressly or impliedly a preference
for one label or the other.” Hudson, 522 U.S. at 99 (internal quotation marks omitted).
The question of which statute provides the “penalizing mechanism” does not have a
straightforward answer, as Congress does not list disgorgement explicitly as a remedy the
SEC can seek for violations of securities laws. But as thoroughly explained by the district
court, the authority for district courts to order disgorgement as a remedy stems from a
variety of statutes.
The complaint in the SEC Action listed 15 U.S.C. §§ 77t(b), 78u(d), 77v(a), and
78aa as jurisdictional bases, and the District of Arizona’s disgorgement order cites
specifically to §§ 77t(d) and 78u(d)(3) as bases for the remedy. See J.A. 22 (complaint in
SEC Action); id. at 148 (disgorgement order in SEC Action). Looking to these statutes,
they each contemplate the district courts overseeing proceedings and assigning remedies
that are civil in nature.
For example, § 77t(d) -- one of the statutes cited as a basis for Appellant’s
disgorgement -- provides that district courts “shall have jurisdiction to impose, upon a
proper showing, a civil penalty to be paid by the person who committed such violation.”
15 U.S.C. § 77t(d)(1) (emphasis supplied). Furthermore, § 77t(b) contemplates the SEC
“transmit[ting] such evidence as may be available concerning such [improper] acts or
practices to the Attorney General who may, in his discretion, institute the necessary
14
criminal proceedings under this subchapter.” 15 U.S.C. § 77t(b). The indication that
different procedures must occur in order to initiate a criminal matter necessarily implies
that an SEC enforcement proceeding over which the district court possesses jurisdiction is
the opposite -- that is, civil.
Other statutes give federal courts the power to entertain suits brought by the SEC in
equity and grant equitable relief. “In any action or proceeding brought or instituted by the
[SEC] under any provision of the securities laws, the [SEC] may seek, and any Federal
court may grant, any equitable relief that may be appropriate or necessary for the benefit
of investors.” 15 U.S.C. § 78u(d)(5) (emphasis supplied). Recently, the Supreme Court
concluded, “[A] disgorgement award that does not exceed a wrongdoer’s net profits and is
awarded for victims is equitable relief permissible under § 78u(d)(5).” Liu v. Sec. & Exch.
Comm’n, --- S. Ct. ---, 2020 WL 3405845, at *2 (U.S. June 22, 2020). The Court reasoned
that disgorgement falls within the “‘categories of relief that were typically available in
equity,’” as “equity practice long authorized courts to strip wrongdoers of their ill-gotten
gains.” Id. at *5 (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 256 (1993)).
In addition, the district courts have jurisdiction over “all suits in equity and actions
at law brought to enforce any liability or duty created by this chapter or the rules and
regulations thereunder.” 15 U.S.C. § 78aa(a) (emphasis supplied); see § 77v(a) (“district
courts . . . shall have jurisdiction of offenses and violations under this subchapter. . . of all
suits in equity and actions at law brought to enforce any liability or duty created by this
subchapter” (emphasis supplied)).
15
The Federal Rules of Civil Procedure make clear that suits in equity are considered
civil actions. See Fed. R. Civ. P. 2, advisory cmte. n.2 to 1937 amend. (“Reference to
actions at law or suits in equity in all statutes should now be treated as referring to the civil
action prescribed in these rules.”); Raplee v. United States, 842 F.3d 328, 332 (4th Cir.
2016) (“The Federal Rules famously abolished distinctions between various types of
judicial proceedings -- like the distinction between ‘actions at law’ and ‘suits in equity’ --
by announcing that ‘[t]here shall be one form of action to be known as “civil action.”’”
(quoting Fed. R. Civ. P. 2 (1938))). Thus, there is strong evidence that Congress, in
establishing these equitable penalizing mechanisms, preferred for the remedies created
therefrom to be civil in nature. 5
b.
Hudson Step Two: Clear Proof of Criminal Punishment?
Moving to step two, even though Congress has indicated a preference that
disgorgement is civil in nature, if Appellant can demonstrate the “clearest proof” to
transform a civil remedy into a criminal punishment, disgorgement may preclude a
5
Appellant believes “disgorgement is not a statutory creation; it is a judicially-
created punishment.” Appellant’s Br. 13. Thus, “the parameters set forth in Hudson must
be tempered in light of the fact that Hudson deals only with statutory punishments.” Id. at
14 (emphasis in original). But Appellant does not explain how the district court should
have tempered the parameters of Hudson, nor does he explain why a punishment that may
be judicially created but nonetheless authorized by statute should not be subject to the
Hudson test, other than simply stating “there is no express authority in any statute that
authorizes disgorgement.” Id. at 15 (emphasis in original).
16
subsequent prosecution under the Double Jeopardy Clause. We use the seven Hudson
factors as “useful guideposts.” 522 U.S. at 99.
i.
Factor One: Affirmative Disability or Restraint
The first factor is whether the disgorgement constituted “affirmative disability or
restraint.” Hudson, 522 U.S. at 104 (internal quotation marks omitted). Hudson compared
such disability or restraint as “approaching the ‘infamous punishment’ of imprisonment.”
Id. (quoting Flemming v. Nestor, 363 U.S. 603, 617 (1960)).
This factor weighs in favor of disgorgement being a civil penalty. The order
requiring the disgorgement of funds did not result in Appellant’s imprisonment, and the
amount of disgorgement did not require him to pay anything from his own pocket; 6 he
merely had to give up the ill-gotten gains from his fraudulent securities scheme. See
Melvin, 918 F.3d at 1300 (rejecting argument that SEC civil penalties constituted an
affirmative disability or restraint). 7
6
The Liu Court noted that, by incorporating “longstanding equitable principles into
§ 78u(d)(5), Congress prohibited the SEC from seeking an equitable remedy in excess of a
defendant’s net profits from wrongdoing.” 2020 WL 3405845, at *8. Appellant does not
challenge the disgorgement award in this case on the ground that it exceeds the net profits
he unlawfully gained, nor does he contend it was not “awarded for victims.” Id. at *2.
Therefore, we save for another day the question of whether a disgorgement award that
exceeds the wrongdoer’s net profits and/or is not awarded for victims can nonetheless be
considered a civil penalty pursuant to the Hudson test.
7
In addition to disgorgement, Appellant also received a civil penalty in the same
amount in the SEC Action. However, he does not challenge the civil penalty as a criminal
punishment; he only challenges the disgorgement.
17
ii.
Factor Two: Historically Regarded as Punishment
The second factor is whether disgorgement has historically been regarded as a
punishment. See Hudson, 522 U.S. at 99. Hudson itself explained that “the payment of
fixed or variable sums of money is a sanction which has been recognized as enforce[a]ble
by civil proceedings since the original revenue law of 1789.” Id. at 104 (alterations and
internal quotation marks omitted). And as the district court explained, “Prior to Kokesh,
courts in multiple circuits specifically held that disgorgement was not a criminal
punishment for Double Jeopardy purposes.” Bank, 378 F. Supp. 3d at 461 (citing Melvin,
918 F.3d at 1301; Van Waeyenberghe, 481 F.3d at 958–59; Perry, 152 F.3d at 904;
Palmisano, 135 F.3d at 865–66; Gartner, 93 F.3d at 635; Bilzerian, 29 F.3d at 696).
Kokesh does not throw the balance of this factor in favor of Appellant. First of all,
even if a penalty is equivalent to some kind of punishment, Kokesh did not say it was a
criminal punishment. Moreover, the Supreme Court expressly limited its holding in
Kokesh when it stated, “The sole question presented in this case is whether disgorgement,
as applied in SEC enforcement actions, is subject to [28 U.S.C] § 2462’s limitations
period.” 137 S. Ct. at 1642 n.3 (emphasis supplied). The Court was not setting out to make
a general proclamation that disgorgement was a punishment for all purposes, especially
Double Jeopardy purposes.
Thus, the second factor weighs in favor of disgorgement as a civil penalty.
18
iii.
Factor Three: Scienter
Third, we consider whether disgorgement “comes into play only on a finding of
scienter.” Hudson, 522 U.S. at 99. Although many of the underlying offenses that lead to
the remedy of disgorgement require scienter for the substantive criminal offense, whether
a court orders disgorgement is not dependent in and of itself on whether the defendant
exhibited scienter.
As mentioned at step one above, there are certain statutes that authorize district
courts to fashion the remedy of disgorgement. But “nothing on the face of [sections 77t(b)
and 78u(d)] purports to impose an independent requirement of scienter. And there is
nothing in the legislative history of either provision to suggest a contrary legislative intent.”
Aaron v. Secs. & Exch. Comm’n, 446 U.S. 680, 701 (1980). Likewise, nothing on the face
of the other statutes mentioned above purport to require scienter before a district court may
order disgorgement.
The third factor weighs in favor of disgorgement as a civil penalty.
iv.
Factor Four: Retribution and Deterrence
The fourth factor to consider is whether the disgorgement ordered in the prior civil
enforcement proceeding “promote[s] the traditional aims of punishment -- retribution and
deterrence.” Hudson, 522 U.S. at 99.
Kokesh tilts this factor in Appellant’s favor. Kokesh specifically stated that “SEC
disgorgement is imposed for punitive purposes” because its “primary purpose . . . is to
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deter violations of the securities laws by depriving violators of their ill-gotten gains.” 137
S. Ct. at 1643 (emphasis supplied) (internal quotation marks omitted). Disgorgement “is
imposed as a consequence of violating a public law and . . . is intended to deter.” Id. at
1644 (emphasis supplied). Further, the Court explained, “disgorgement orders go beyond
compensation, are intended to punish, and label defendants wrongdoers as a consequence
of violating public laws.” Id. at 1645 (internal quotation marks omitted). Because of this
strong language from the Supreme Court, the fourth factor weighs in favor of disgorgement
as a criminal penalty.
v.
Factor Five: Behavior that is Already a Crime
Fifth, we ask whether the behavior to which the disgorgement applies “is already a
crime.” Hudson, 522 U.S. at 99. This factor, too, weighs in favor of Appellant. Here,
although Appellant did not admit to the allegations in the SEC complaint, the disgorgement
order also enjoined Appellant from committing violations of the substantive offenses set
forth in 15 U.S.C. §§ 77q(a), 77e, 78j(b), and 78o(a), and 17 C.F.R. § 240.10b-5. These
offenses are also punishable as crimes under § 77x (applying to violations of 15 U.S.C.
§ 77a–77aa) or § 78ff (applying to violations under 15 U.S.C. § 78a–78qq).
vi.
Factor Six: Alternative Purpose
Sixth, we ask if there is “an alternative purpose to which [disgorgement] may
rationally be connected,” Hudson, 522 U.S. at 99, in order to determine whether the
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“remed[y] ha[s] a clear rational purpose other than punishment,” Palmisano, 135 F.3d at
866.
Kokesh resolves this factor in favor of the Government. There, the Court explained
that although the primary purpose of disgorgement is punishment, there are other purposes
as well. 137 S. Ct. at 1643, 1645 (recognizing that disgorgement can be both remedial and
punitive). As Dyer recognized, “there are ‘clear rational purposes’ for disgorgement other
than punishment.” 908 F.3d at 1003 (quoting Palmisano, 135 F.3d at 866) (alteration
omitted). These nonpunitive purposes include “ensuring that defendants do not profit from
their illegal acts, ‘encouraging investor confidence, increasing the efficiency of financial
markets, and promoting stability of the securities industry.’” Id. (quoting Palmisano, 135
F.3d at 866); see also Secs. & Exch. Comm’n v. Cavanagh, 445 F.3d 105, 117 (2d Cir.
2006) (“[T]he primary purpose of disgorgement is not to compensate investors. Unlike
damages, it is a method of forcing a defendant to give up the amount by which he was
unjustly enriched. The emphasis on public protection, as opposed to simple compensatory
relief, illustrates the equitable nature of the remedy.” (citation and internal quotation marks
omitted)).
Therefore, this factor weighs in favor of disgorgement as a civil penalty.
vii.
Factor Seven: Excessive in Relation to Alternative Purpose
Finally, we ask whether disgorgement “appears excessive in relation to the
alternative purpose assigned.” Hudson, 522 U.S. at 99–100. This factor weighs in favor
of disgorgement as a civil penalty. Disgorgement is meant to be limited to the amount of
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illegal profits gained by a defendant, and as such, it is less likely that disgorgement “will
be excessive in relation to Congress’s nonpunitive goals.” Palmisano, 135 F.3d at 866.
c.
Kokesh’s Effect on Hudson
Appellant contends that, while Hudson “provides a useful starting point,” it “must
be read in conjunction with Kokesh.” Appellant’s Br. 14. Appellant admits that Kokesh
did not go so far as to declare disgorgement a criminal penalty for purposes of Double
Jeopardy. But he insists, “While the lower court is correct that the question of whether
disgorgement is a punishment for Double Jeopardy purposes was not before the Supreme
Court in Kokesh, the Supreme Court could not have been more direct in its holding and the
implication is unmistakable [that disgorgement is a Double Jeopardy punishment].” Id. at
8. Appellant believes Kokesh “represents a substantial change from prior case law. In both
its holding and analysis[,] the Court fundamentally altered the definition of what constitutes
a punishment.” Id.
However, as the district court observed, “[Appellant’s] motion asks this Court to
reach beyond the express limitations of Kokesh and hold that it overturned years of case
law declaring that disgorgement is not a punishment for criminal Double Jeopardy
purposes.” Bank, 378 F. Supp. at 462. Accordingly, “because Kokesh was expressly
limited to the application of 28 U.S.C. § 2462, it did not change the historical view of
disgorgement and declare disgorgement to be a criminal punishment.” Id. As explained
above, although Kokesh tipped two of the Hudson factors in favor of Appellant, it did not
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go so far as to provide the “clear[] proof” Appellant needs for his motion to dismiss to
succeed. Hudson, 522 U.S. at 100.
d.
Conclusion
For these reasons, the balance of the factors weighs in favor of deeming
disgorgement a civil penalty. Again, Hudson directs that we must find the “clearest proof”
that the civil penalty is actually meant to be criminal in nature. 522 U.S. at 100. An
analysis of the seven Hudson factors demonstrates the proof here is far from clear.
Therefore, we hold that disgorgement is a civil penalty, and it does not fit within the
parameters of the Double Jeopardy Clause.
IV.
For the reasons set forth above, the judgment of the district court is
AFFIRMED.
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DIAZ, Circuit Judge, concurring in the judgment:
I have no quarrel with the majority’s conclusion that disgorgement is a civil penalty
for purposes of the Double Jeopardy Clause. But I find it unnecessary to decide that
question, as I believe that the Consent Agreement contains a valid waiver of Bank’s right
to assert a double jeopardy claim in this criminal proceeding.
As the majority rightly observes, we “indulge every reasonable presumption against
waiver of fundamental constitutional rights.” Johnson v. Zerbst, 304 U.S. 458, 464 (1938)
(cleaned up). But this waiver clause invites no such reasonable presumptions. When Bank
entered into the Consent Agreement with the SEC, he “waive[d] any claim of Double
Jeopardy based upon the settlement of [the] proceeding, including the imposition of any
remedy or civil penalty [t]herein.” J.A. 137. On its face, then, the clause forfeits Bank’s
right to bring the present claim: a “claim of Double Jeopardy based upon . . . the imposition
of . . . [a] remedy or civil penalty” pursuant to the SEC proceeding. Id.My colleagues nonetheless find the waiver to be ambiguous. In particular, they
would require Bank to have explicitly waived the right to bring a double jeopardy claim in
future criminal proceedings. But double jeopardy claims necessarily involve future
criminal proceedings. See Hudson v. United States, 522 U.S. 93, 99 (1997) (“The [Double
Jeopardy] Clause protects only against the imposition of multiple criminal punishments for
the same offense, and then only when such occurs in successive proceedings.” (cleaned
up)). Failure to include such surplusage doesn’t render the waiver clause ambiguous.
Nor am I persuaded by the majority’s observation that “[a]t the time [Bank] signed
the Consent Agreement, the Supreme Court had not considered disgorgement to be a
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penalty.” Maj. Op. 6. As my colleagues correctly note elsewhere in their opinion, Kokesh
was “narrowly confined to interpretation of a statute of limitations provision.” Maj. Op. 9.
Kokesh did not, then, broadly redefine the meaning of either “penalty” or “disgorgement”
as contemplated by the waiver. And even if it did, Bank also waived the right to bring a
double jeopardy claim based on the imposition of “any remedy.” J.A. 137 (emphasis
added). Regardless of its effect on the definition of “penalty,” Kokesh certainly had no
effect on disgorgement’s longstanding status as a “remedy.” See Kokesh v. SEC, 137 S.
Ct. 1635, 1643 (2017) (referring, without comment, to SEC disgorgement as a “remedy”).
***
In sum, Bank waived the right to assert a double jeopardy claim in this case. On
that ground alone, I would affirm the district court’s judgment.
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